Auditor management amid economic policy uncertainty: does corporate social responsibility matter?

Abstract

Purpose: This study aims to examine the impact of economic policy uncertainty (EPU) on Chinese firms’ auditor management, and how corporate social responsibility (CSR) moderates the impact. Design/methodology/approach: Fixed-effect probit models with a rich set of control variables at firm-level and country-level are used to disentangle the impact in a sample of Chinese-listed firms from 2003 to 2019. Findings: The author documents that Chinese firms opt for non-Big 4 auditors during heightened periods of EPU, and this decision is attributed to Big 4 auditors’ unnegotiable audit fees and firms’ lowered financial reporting quality during economic policy unpredictability. This finding holds with the instrumental variable approach and after accounting for the client’s endogenous choice of auditors. Interestingly, CSR categorically relieves the impact of EPU, thus embracing the risk mitigation theory regarding the insurance role of CSR. Research limitations/implications: The findings imply that moving from Big-4 auditors to non-Big 4 counterparts during high EPU periods indicates firms’ greater reporting risk and CSR firms tend not to compromise their audit quality through auditor management.